How Contract Rights and Public Sector Governance Affect Infrastructure Investment

The Philippine Experience

A Visiting Scholar at the York Center for Asian Research, York University, Toronto, Canada and also an Associate Professor at the Graduate School of Business, De La Salle University, Makati City, Philippines. rgavieta@compass.com.ph

Abstract

Contract enforcement risk has become more prevalent in build-operate-transfer (BOT) projects. Recent trends in Southeast Asia have shown that non-enforcement of contract rights by the public sector have common characteristics such as: introduction of competitors into a contractual relationship believed to have been already awarded as a monopoly, opportunistic behavior of a public-sector joint venture partner, and attempts to void or renegotiate a contract on the grounds that it provides excessive profit to the private sector. The Philippines, in particular, traces non-enforcement of contract rights back to weak enforcement of property rights. The author's recommendations for the Philippines include the establishment of a private-sector investment fund by a multilateral agency, from which amounts could be drawn while disputes between the sovereign and the private sector were under settlement in the International Commerce Court; the formation of a bureau for monitoring official development assistance (ODA) and BOT projects by a multilateral agency; the assumption by equity investors of debt positions in their projects to ensure pari passu status with other lenders in negotiations with the sovereign; and empowerment of the informal sector to promote contract rights enforcement.